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INTRODUCTION TO ECONOMICS (Ten Principles of Economics (How people make…
INTRODUCTION TO ECONOMICS
Ten Principles of Economics
How people make decisions?
People face trade-offs
:check: there is no such thing as free lunch
:check: to get one thing, we need to give up something
:check: efficiency vs equity
2 Cost of something to give up to get other things
:check: decisions require comparing costs & benefits of alternatives
:check: an item that you need to give up to obtain others is called 'opportunity cost'
Rational people thinks at the margin
:check: marginal changes are small, incremental adjustments to an existing plan of action
:check: people decides by comparing cost & benefits at the margin
People respond to incentives
:check: marginal changes motivates people to responds
:check: decision made when alternative's marginal benefits exceed its marginal costs (marginal benefit > marginal costs)
How people interact?
Trade can make better off
:check: competition results in gains of trading
:check: trade allows people to specialize in their works
Market as a way to organize economic activity
:check: market economy:economy that allocates resources through decentralized decisions of many firms & household
:check: Adam Smith said that households & firms interact as if guided by an 'invisible hand'
Government roles can improves market outcomes
:check: markets work only if property rights are enforced
:check: market failure occurs when market fail to allocate resources efficiently
:check: market failure may cause externality & market power
:check: when market fails, government can intervene to promote efficiency & equality
How the economy work as a whole?
Society faces a short-run trade-off between inflation & unempolyment
:check: Phillips curve illustrates the trade-off between inflation & unemployment
:check: trade-off plays a key role in the analysis of
business cycle-flunctuations in the economic activity
Price rise when there are too much money
:check: too much money can cause inflation
Standard of living depend on ability to produces goods & services
:check: standard of living may be measured in different ways whether by personal incomes or by the total market value of a nation's production
Economist as a Scientist
Economic way of thinking
Make use of scientific method
use abstract to explain complex, real world operates
develops theories, collect & analyzes data to evaluates the theories
Role of assumption
economist make assumption to make the world easier to understand
different assumptions to answer different questions
Economic models
1st model: the circular-flow diagram
2nd model : production possibilities frontier
Economist as Policy Advisor
Positive vs Normative analysis
positive statement
- statement that attempt to describe the world as it is (aka descriptive analysis)
normative statements
- statements about how the world should be (aka prescriptive analysis)
Economist in Malaysia
serve as advisers in the policy making process of three branches of government
:check: legislative
:check: executive
:check: judicial
Interdependence & the gains from trade
individuals & nations rely on specialized production &exchange as a way to address problems caused by scarcity
:check: occurs when people are specialized in work & trade with other
:check: pattern of products and trades are based upon differences in opportunity costs
A Parable for the Modern Economy
without trade, economic gains are diminished
Specialization will encourage more trade-offs
trade may expand the set of consumption opportunities
Advantage in Economics
Comparative Advantage
- differences in the costs of production determine who should produce what & how much should be traded for each product
:!: producer who has the smaller opportunity cost of producing a good is said to have a 'comparative advantage'
Ways to measure differences in cost of production:
:check: number of hours to produced a unit of output
:check: the opportunity cost of a thing for another
Absolute advantage
- the comparison among producers of a good according to their productivity
:!: producer that requires a smaller quantity of inputs to produce a good is said to have an 'absolute advantage'
comparative advantage & differences in opportunity costs are the basis for specialization & trade
:check: whenever potential trading parties have differences in opportunity costs, they can each benefit from trade
:!:trade allows people to specialize in activities in which they have a comparative advantage
